1 Chapter 1 Introduction Time and again, economic growth has been considered as one of the surest signs of a country’s overall health. As per definition economic growth is a long term expansion of the productive potential of an economy. While economists, government and individual may all have their own opinions about what should constitute economic growth, the truth is all of these things working together help create an overall healthy economy. Without one piece, the entire puzzle may fall apart. Unfolding the economy of Mauritius, it can be seen that a lot of development took place for the past decades. Indeed, the island had witnessed various changes when it comes to the economic activities. From a mono-crop economy depending mainly on sugar, Mauritius has been diversified in such a way that it is known worldwide for the services it provides. Indeed, Mauritius observed an economic growth of -10.1% in the year 1980 while in 2009 the growth was estimated at 3.1%. This rise in the Gross Domestic Product (GDP) of the country can be explained by a number of factors. Some factors such as changes in consumer and business confidence, aggregate demand conditions and monetary and fiscal policy, tend to have a mainly temporary effect on growth. Other factors such as unemployment rate and productivity growth have more enduring effects and help to determine the economy’s average growth rate over a longer period of time. Using time series data for the Mauritian economy for the period 1976-2009, the relationship of the determinants of the economic growth shall be modeled. To reiterate further, factors such as openness, investment, inflation rate, literacy rate and financial intermediation will be considered. The data will be tested whether in Mauritius context, the relationship of these determinants mentioned above is significant. Subsequently nominal GDP per capita was used to represent economic growth, primary enrollment ratio was used to represent literacy rate, GDFCF was used to represent investment and CPI to represent inflation.
35
Embed
Macroeconomic factors and economic growth in Mauritius
It analyses the factors affecting and contributing towards economic growth.
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
1
Chapter 1
Introduction
Time and again, economic growth has been considered as one of the surest signs of a country’s
overall health. As per definition economic growth is a long term expansion of the productive
potential of an economy. While economists, government and individual may all have their own
opinions about what should constitute economic growth, the truth is all of these things working
together help create an overall healthy economy. Without one piece, the entire puzzle may fall
apart.
Unfolding the economy of Mauritius, it can be seen that a lot of development took place for the
past decades. Indeed, the island had witnessed various changes when it comes to the economic
activities. From a mono-crop economy depending mainly on sugar, Mauritius has been
diversified in such a way that it is known worldwide for the services it provides. Indeed,
Mauritius observed an economic growth of -10.1% in the year 1980 while in 2009 the growth
was estimated at 3.1%. This rise in the Gross Domestic Product (GDP) of the country can be
explained by a number of factors.
Some factors such as changes in consumer and business confidence, aggregate demand
conditions and monetary and fiscal policy, tend to have a mainly temporary effect on growth.
Other factors such as unemployment rate and productivity growth have more enduring effects
and help to determine the economy’s average growth rate over a longer period of time.
Using time series data for the Mauritian economy for the period 1976-2009, the relationship of
the determinants of the economic growth shall be modeled. To reiterate further, factors such as
openness, investment, inflation rate, literacy rate and financial intermediation will be considered.
The data will be tested whether in Mauritius context, the relationship of these determinants
mentioned above is significant. Subsequently nominal GDP per capita was used to represent
economic growth, primary enrollment ratio was used to represent literacy rate, GDFCF was used
to represent investment and CPI to represent inflation.
2
Below there shall be an analysis of the effects that each factor has on economic growth and their
respective trends throughout the period 1976-2009. Furthermore, various tests will be carried out
to determine the relationship between the independent and the dependent variable and these
include the Link test, a Regression analysis, a Correlation analysis, test for Multicollinearity, and
finally a test for Serial Correlation will be undertaken.
This introduction will be followed by Chapter 2 where past research will be reviewed. Chapter 3
consists of an overview of the Mauritian economy. The methodology will subsequently be
considered in Chapter 4. Chapter 5 consists of the interpretation and analysis part of the model.
The last steps that will be undertaken are the policy implications of the model and finally the
conclusion in Chapter 6.
3
Chapter 2
Literature Review and Empirical Evidence
Economists have long been interested in the factors which cause different countries to grow at
different rates and achieve different levels of wealth. This issue is especially relevant today. The
1990 World Bank World Development Report highlights the scale of global poverty and the
importance of economic growth in alleviating poverty. The historical record shows a broad range
of outcomes in achieving su3tained economic growth. Some countries have achieved high
incomes while many remain at lower levels. Determining the reasons for these differences
remains an important theoretical and empirical task. We review recent theoretical advances in
growth theory which are potentially relevant to development policymakers and the existing
empirical literature on the determinants of economic growth.
Data limitations complicate generalizing these findings to periods before the twentieth century
and to geographical areas beyond the United States. However, the rise of modern economic
growth over the last few centuries seems to roughly coincide with the rise of mass schooling
throughout the world. The sustained growth in income per capita evidenced in much of the world
over the past two to two and a half centuries is a marked divergence from previous tendencies.
Bloom and others confirm the findings of Tilak (2003) that one possible channel through which
higher education can enhance economic development in poor/ developing countries is through
technological catch-up. In knowledge economy, tertiary education can help economies gain
ground on more technologically advanced societies as graduates are likely to be more aware of
and better able to use new technologies.
Keynesians postulate that the impact of money in an economy depends the ability of money to
influence interest rate, rate of interest to influence demand for investment fund and for
investment fund to influence national income. In line with this, the Harrod-Dommar postulates
that changes in national income depend linearly on change in capital stock. Investment or change
in capital stock if financed out of domestic savings. In summary the Harrod-Dommar growth
model summaries as follows, economic growth will proceed at the rate which society can
mobilize domestic savings resources coupled with the productivity of the investment (Somoye,
4
2002). The creation of a pool of investment fund is the objective of bank financial
intermediation. Banks through credit creation provide a pool of investment funds for borrowers.
But the ability of banks to create credit to a large extent depends on the development of a
nation’s banking system.
Fischer (1993) results indicate that inflation reduces growth by reducing investment and
productivity growth. He further notes that, low inflation and small fiscal deficits are not
necessary for high growth even over long periods; likewise, high inflation is not consistent with
sustained economic growth. Ghosh and Phillips (1998), using large panel dataset, covering IMF
member countries over 1960 to 1996, found that at very low inflation rates (less than 2-3 per
cent) inflation and growth are positively correlated. However, they are negatively correlated at
high level of inflation. Similarly, the empirical results of Nell (2000) suggest that inflation within
the single-digit zone may be beneficial, while inflation in the double-digit zone appears to
impose slower growth.
International trade indicators can be of two categories: price-based and quantity-based indicators.
The most commonly used measure is the degree of openness which is defined by exports plus
imports divided by GDP
Trade Openness = (Exports + Imports) / GDP
Where X is the value of exports, M is the value of the imports, and the GDP is the total Gross
Domestic Product.
Economic growth is defined by the increase of goods and services produced by the country over
time. It is measured as the percentage of the increase of the real Gross Domestic Products (GDP)
(Sullivan & Steven, 2003). The relationship between globalization and economic growth has
been extensively researched and investigated. Dollar (1992) analyzed the relationship between
economic performance and trade openness, while Frankel and Romer (1996) studied the
relationship between growth and actual trade flows. Their results show that openness and trade
flows are significantly related to the economic growth.
5
Chapter 3
Overview of the Economic Growth history in Mauritius
Despite its several weaknesses, Mauritius has transformed itself from a poor mono-crop
economy into one of the most successful economies in Africa in recent decades. Using
purchasing power parity (PPP) data for 44 Sub-Saharan African countries, Arbache and Page
(2008), for example, examined country-level dynamics of long-run growth between 1975 and
2005 and conclude that Mauritius was one of the best performers, both in terms of per capita
growth performance and in terms of low growth volatility.
Real GDP growth averaged more than 5 percent between 1970 and 2009, while GDP per capita
has increased more than tenfold over the same period. In its heyday in the 1970s, the sugar sector
in Mauritius accounted for close to one-third of employment, one-third of export earnings, and
one-quarter of GDP. Through smart negotiations and building on a preexisting relationship with
the United Kingdom, Mauritius succeeded in obtaining preferential treatment from the European
Economic Community (EEC) through the Sugar Protocol of the Lomé Convention in 1975,
under which it received more or less free access for its sugar exports to the EEC.
In 1970, Mauritius passed the Export Processing Zone Act, which provided powerful incentives
to manufacturers to cater for foreign markets. Key components of the new legislation included
protective import duties and quotas for infant industries, suspension of import duties on materials
and equipment for industrial use rebates of import duties on other raw materials and components
for specified industries, duty drawback schemes, and favorable long-term loans. The granting of
duty-free inputs for manufactured exports was a key policy in expanding Mauritius’ export
competitiveness on world markets, while tax incentives provided to the exporting firms helped
subsidize exports.
Though Mauritius benefited from the sugar protocols, the government also recognized early on
the advantages of diversification. As the sugar and EPZ sectors in Mauritius struggled, the
tourism sector has expanded rapidly; according to the Mauritius Chamber of Commerce, tourist
arrivals reached 240,000 in 1988, 400,000 in 2000, and 900,000 in 2008.
6
Efforts at economic diversification have been successful, allowing the country to move from
sugar to textiles to a broader service economy, embracing new sectors, particularly light
manufacturing, offshore banking and financial services, and service-related information and
communication technology (ICT). Development of the information technology sector was
intended to transform Mauritius into a “cyber-island” by creating a high-tech multi-storeyed
tower with strong technological capabilities that provides a home to companies from all over the
world to set up operations, manage data, facilitate e-commerce, and establish call centers.
Though a variety of explanations have been developed to explain Mauritius’ growth
performance, there is no doubt that the country’s focus on international trade has been a critical
element of that performance; open trade policies have been important in sustaining growth.
Simultaneously, Mauritius pursued a very liberal investment regime and used incentives to
attract foreign direct investments (FDI). The island has also developed a plethora of strong
institutions and good governance.
Fiscal policy in Mauritius has focused on ensuring that spending remains linked to the resource
availability. On the other hand, monetary policy has helped anchor economic growth and ensured
competitiveness. Since its creation in 1967, the Bank of Mauritius has been concerned with
ensuring the competitiveness of the country’s export sectors and, secondly, with price stability.
Furthermore, another major reason for Mauritius’ economic success has been its business climate
and incentives for foreign companies to locate therein. Mauritius has no capital controls, a
relatively stable currency, a low flat corporate tax rate of 15 percent, and a large number of
double taxation avoidance agreements; together, these attributes sometimes make Mauritius
more attractive than larger financial sectors for businesses. The World Bank’s Doing Business
2010 ranks Mauritius as the best country in which to do business in Africa. Overall, Mauritius is
ranked 17th out of 183 countries ranked in the 2010 survey.
During and in the aftermath of the biggest exogenous shocks to its economy in recent times—the
phasing out of the Multifibre Arrangement governing textiles, significant reductions in EU sugar
protocol prices, the 2008 food and fuel crisis, and the 2008–09 global financial crisis—
Mauritius’s economy has displayed strong resilience. Morisset, Bastos, and Rojid (2010) find
7
that the country’s resilience to the shocks was a combination of four factors: reforms to sustain
long-term growth, which accelerated in 2006; timely, targeted, and temporary short-term
response to the crisis; institutional arrangements to face the crisis that promoted private sector
collaboration; and strong relationships.
8
Chapter 4
METHODOLOGY
In this assignment, the effect of the above mentioned macroeconomic factors on the economic
growth of Mauritius will be tested. In this context, a very simple economics function has been
adopted as follows:
Economic growth = f (literacy rate, financial intermediation, inflation, trade
openness, GDFCF)
For analytical purposes and to conduct various tests using STATA, we have transformed the
function into an econometric model which can be described as follows:
Thus using STATA, it has been confirmed that the data model opted is relevant. However, it is to
be noted that in reality there are other economic and non economic factors which impact on
economic growth.
32
References:
Book: Gujarati, Basic Econometrics, 4th Edition
Report: Mauritius. Bank of Mauritius- Annual report, 30 June 2011
Journals and Working Papers:
Helen V. Milner and Keiko Kutoba (Winter, 2005). ‘Why the move to Free Trade? Democracy and Trade Policy in the Developing Countries’ International Organization, 59(1): 107-143
Anupam Basu, Evangelos A. Calamitsis, Dhaneshwar Ghura (Aug 2010). ‘Promoting Growth in Sub-Saharan Africa’ International Monetary Fund
Cesar calderon, Norman Loayza, Klaus Schmidt-Hebbel (October 2005). ‘Does Openness imply greater Exposure’ World Bank Policy Research Working Paper 3733
Ali Zafar (January 2011). ‘Mauritius: An Economic Success Story’
Arvind Subramanian and Devesh Roy (August 2001). ‘Who can Explain the Mauritian Miracle: Meade, Romer, Sachs, or Rodrik?’ International Monetary Fund working Paper
Data source:
International Monetary Fund - http://www.imf.org/external/index.htm
World Bank - http://www.worldbank.org/
Stata -http://data.princeton.edu/stata/Introduction.html